New v119n3a2 An empirical long-term commodity price range for … · 2019. 4. 3. · Code) in 2000 informed the basis for analysing long-term commodity price ... establish their long-term

The South African Code for the Reporting ofExploration Results, Mineral Resources andMineral Reserves (SAMREC Code) defines aMineral Resource as ‘a concentration oroccurrence of solid material of economicinterest in or on the Earth’s crust in suchform, grade or quality and quantity that thereare reasonable prospects for eventual economicextraction’ (SAMREC, 2016, p. 18). MineralResources are categorized according toincreasing levels of geoscientific confidence orknowledge, from Inferred to Indicated andlastly, Measured categories. The SAMREC Codedefines a Mineral Reserve as ‘the economicallymineable part of a Measured and/or IndicatedMineral Resource’ (SAMREC, 2016, p. 25). Insome of the other reporting codes such as theAustralasian Code for Reporting of ExplorationResults, Mineral Resources and Ore Reserves

(the JORC Code), a Mineral Reserve issynonymous with an Ore Reserve. Theconversion of Mineral Resources to MineralReserves involves applying modifying factors,which are non-resource considerations. Themodifying factors used in the Mineral Reserveestimation process include mining,metallurgical, processing, infrastructure,economic, marketing, legal, environmental,social, and governmental factors. Each of thesemodifying factors consists of severalcomponents which require due considerationin the estimation of Mineral Reserves. Table Ishows some of the components typicallyconsidered for each of the modifying factors.

It can be argued that, consideredcollectively, Mineral Resources and MineralReserves are the single most significant assetor among the most significant assets for anymining company (Njowa and Musingwini,2018). International reporting codes providethe minimum standards and guidelines for theestimation, declaration, and public reporting ofExploration Results, Mineral Resources, andMineral Reserves. The reporting of ExplorationResults, Mineral Resources, and MineralReserves serves the needs of governments,international organizations, investors andpotential investors and their advisors(SAMREC, 2016). International organizationsare interested in the in situ estimates ofmineral inventories to inform worldperspectives on strategic and critical minerals,while governments rely on these estimates todesign policies for safeguarding their mineralendowments and ensuring that their citizenscan benefit from the exploitation of thoseminerals (Musingwini, 2018). Investors are

An empirical long-term commodity pricerange for Mineral Reserve declarationsto minimize impairments in gold andplatinum minesby V. Maseko1 and C. Musingwini2

When considered collectively, Mineral Resources and Mineral Reserves arearguably a key asset for any mining company. Mineral Reserves are theeconomically mineable portions of Mineral Resources. They thereforeprovide a good indication of the economic prospects in the short tomedium term and associated non-financial impairments for miningcompanies, hence a focus on Mineral Reserves. An assessment ofmodifying factors for converting Mineral Resources to Mineral Reservesrevealed that Mineral Reserves were most sensitive to long-termcommodity prices, hence the focus on long-term commodity prices. Thejustification for selecting gold and platinum mines is that they collectivelymake a significant contribution to South Africa’s earnings from mining.

The introduction of the South African Code for the Reporting ofExploration Results, Mineral Resources and Mineral Reserves (SAMRECCode) in 2000 informed the basis for analysing long-term commodity priceassumptions for major South African gold and platinum mining companiesbetween 2000 and 2016. The analysis revealed that the least number ofnon-financial impairments occurred when long-term commodity priceswere within ±5% of spot prices. This finding suggests that this range is theideal range for long-term commodity price assumptions to improveconfidence in Mineral Reserve declarations and minimize impairments.

modifying factors, long-term commodity prices, spot prices, impairment,reporting codes.

1 Ernst & Young Advisory Services Limited, SouthAfrica.

2 School of Mining Engineering, University of theWitwatersrand, South Africa.

© The Southern African Institute of Mining andMetallurgy, 2019. ISSN 2225-6253. Paper receivedAug. 2018; revised paper received Jan. 2019.

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http://dx.doi.org/10.17159/2411-9717/2019/v119n3a2

An empirical long-term commodity price range for Mineral Reserve declarations

interested in the economically extractable portion of themineral deposit as this is a good indicator of the economicprospects for mining companies in the short to medium term.Securities exchanges worldwide have an overarchingprinciple of protecting investors and so require transparentand consistent reporting of Mineral Resources and MineralReserves for easier decision-making by investors. Thenational reporting code in South Africa is the SAMREC Code.The SAMREC Committee (now SAMCODES StandardsCommittee or SSC) first published the SAMREC Code inMarch 2000 and later that year the Johannesburg StockExchange (JSE) adopted the Code, requiring compliance withthe Code as part of the Listing Requirements for miningcompanies.

The reporting codes are principles-based and thereforenot prescriptive. This gives the Competent Person (CP) somediscretion in estimating and reporting Mineral Resources andMineral Reserves, if their approaches and methodologies arereasonable and defendable. The discretion includesassumptions on modifying factors. The 2016 Edition of theSAMREC Code attempted to address the shortcomingsassociated with the discretion exercised by CPs byintroducing the ‘if not, why not’ reporting principle. Thisprinciple requires that CPs must report on every aspect asspecified in Table I of the SAMREC Code, otherwise they needto provide reasonable justification for not reporting on certainelements (Lomberg and Rupprecht, 2017). This principlemakes it more difficult for a CP to be selective whenreporting, thus enabling the CP to include all the informationthat stakeholders, investors, potential investors, and advisorswould reasonably expect to find in a public report (Lombergand Rupprecht, 2017). One of the modifying factors forwhich a CP needs to exercise reasonable discretion is long-term commodity prices. Long-term commodity prices are oneof the most important modifying factors used in MineralReserve estimation. Mineral Reserves are the economicallymineable portions of Mineral Resources; hence, they providea better indication of the economic prospects for miningcompanies in the short to medium term. In order to minimizevariations in long-term commodity price assumptions, thisresearch study undertook to estimate an ideal range of long-term commodity prices relative to spot prices. By minimizingvariations, it should be possible to improve confidence in thereporting of Mineral Reserves.

Commodity prices are very important in the Mineral Reserveestimation process. For example, as Appleyard (2001, p. 8)argued, ‘the most sensitive inputs to a mine valuation arethose which relate to revenue. While metallurgical recoverydirectly relates to revenue, the factors which are usuallysubject to most variation are the price for the commodity’.Conducting a valuation is a critical step in establishing theeconomic viability of Mineral Reserves. Therefore, thestatement by Appleyard (2001) indicates that although allother modifying factors are important in the estimation ofMineral Reserves, commodity price assumptions are the mostimportant modifying factor. However, commodity pricesfluctuate over time as dictated by market forces andinternational reporting codes do not require the revision ofMineral Reserve estimates due to short-term commodity pricemovements. Another revenue driver, which is critical to themine valuation process, is grade, as grade (together withproduction volumes and metallurgical recovery) is a keydriver of saleable product volumes to which commodity pricesare applied to estimate revenue. The reporting codes provideguidance on the use of long-term price assumptions forMineral Reserves estimation. The arguments put forward byauthors such as Appleyard and Smith (2001), and Baker andGiacomo (2001) are in agreement with these guidelines ofthe reporting codes.

Appleyard and Smith (2001, p. 327) argued that the‘failure to recognise that a price decrease means that aprevious Ore Reserve is now a body of uneconomicmineralisation, can cause a company to continue operatinguntil it is in a position where it can fail’. This argumentindicates that in a volatile commodity market, commodityprice decreases significantly affect the quantum of MineralReserves and can impair the economic viability of a miningoperation if they persist in the long term. Baker and Giacomo(2001, p. 669) also argued that commodity prices are criticalin that ‘fundamental to the determination of reserves (and toa lesser extent resources) is the underlying metal priceassumptions used in the estimation. Contained metal can behighly sensitive to metal price assumptions employed,especially where the margin between cost and revenue issmall. At best, a company could consider providingsensitivities of tonnes and grade to commodity price

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Table I

Mining Mining method, dilution and mining recovery, production rates, operating and capital costs, the degree of selective mining, gradecontrol, geotechnical influences, ventilation, use of stope fill, mode of access to underground mines, overall mining sequence.

Metallurgical Test sample representativeness, product specification, metallurgical recovery and throughput, ore characteristics, operating and capitalcosts, variable ore characteristics and their potential impact on process performance, overall economics.

Economic Commodity price forecasts (including the impact of hedging), royalties, operating and capital costs.Marketing Sales projections, analysis of demand trends and estimates for off-site treatment terms and costs, product quality and blending abilities

(for commodities such as iron ore, coal, and industrial minerals).Legal Political risk and security of tenure, environmental factors.Social Sustainable development and social license to operate.Governmental Government regulatory framework.

assumptions. At the very least we are of the view thatcompanies should disclose the price at which thedeterminations are made (in appropriate currencies)’. Thisargument indicates that Mineral Reserve estimates are verysensitive to commodity prices. It was therefore, necessary toexplore the impact that commodity price assumptions haveon Mineral Reserves, but also simultaneously evaluating theimpacts of other modifying factors on Mineral Reserves toobtain a balanced view.

In order to address the objective set out for this researchstudy, firstly it was necessary to review the annual reportsand other publications (available in the public domain) ofmajor South African gold and platinum mining companies toestablish their long-term commodity price assumptions. Thereview focused on the period from 2000 to 2016, which isassociated with improved Mineral Resource and MineralReserve reporting following the introduction of the SAMRECCode in 2000. The selection of gold and platinum mining waspremised on the fact that these two commodities contribute asignificant portion of South Africa’s earnings from mining,together making up approximately 44% and 37% of miningincome in 2012 and 2015, respectively (Table II). The othermajor South African commodities, which are coal and ironore, were not included in this research study since theyconsist of many different product types and trade differently,usually under contractual agreements. The prices of theseother major commodities are thus set in contractualagreements, unlike the more fungible gold and platinumcommodities that trade openly in commodity exchangemarkets where market forces drive commodity spot prices.

The second step entailed comparing the long-termcommodity price assumptions of the major South Africangold and platinum mining companies to actual prices from2000 to 2016. This comparison provided a basis forestablishing the reasonability of the long-term commodityprices used by South Africa’s gold and platinum miningcompanies in their Mineral Reserve estimations anddeclarations.

The third step involved evaluating correlations betweenthe long-term commodity price assumptions and the othermodifying factors, and the Mineral Reserve declarations ofthe major South African gold and platinum mining companiesfrom 2000 to 2016 to determine if long-term commodityprices had the most significant impact on the Mineral Reserveestimates. Lastly, it was necessary to make an estimation ofthe ideal range for the long-term commodity priceassumptions for the Mineral Reserve estimates for SouthAfrican gold and platinum mining companies based on theprice range associated with the least number of impairments.The following paragraphs explain the concept of impairmentand describe the link between commodity prices andimpairments.

Commodity price is a primary driver of value for miningcompanies (MacDiarmid, Tholana, and Musingwini, 2018).Therefore, commodity price fluctuations will affect thecompany value reported by mining companies in theirfinancial statements. Financial statements typically capturethe assets of mining companies as either tangible assets,such as property, plant, and equipment, or intangible assetsassociated with mining rights. The long-term commodityprices assumed by mining companies have a direct impact onthe value of the assets associated with mining rights.

The International Accounting Standard 36 (IAS 36) is an accounting standard that provides guidance to companiesfor the impairment of assets. IAS 36 states that companyfinancial statements should not carry (or record) the assets ata value which is greater than would be recoverable throughuse or sale. If the carrying value exceeds the recoverablevalue, then a company should recognize an impairment. IAS36 does not cover financial assets, inventories, deferred tax,and other assets as other accounting standards provideguidance for their impairment (IFRS Foundation, n.d.).

The impairments recorded by mining companies for theirnon-financial assets are a reliable proxy of the effects of theirlong-term commodity price assumptions. Where miningcompanies record the value of their property, plant, andequipment or the value of their mining rights on theirfinancial statements using long-term commodity prices that


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Table II

Coal and lignite 96 097 24.4 117 958 28.1Gold and uranium ore 66 957 17.0 63 674 15.2Iron ore 68 061 17.3 60 699 14.5Chrome ore 11 412 2.9 16 383 3.9Manganese ore 10 254 2.6 17 093 4.1Platinum group metal ore 106 555 27.1 91 099 21.7Dimension stone (granite, marble, slate and sandstone) 630 0.2 1 146 0.3Limestone and limeworks 2 398 0.6 2 717 0.6Other stone quarrying, including stone crushing and clay and sandpits 10 289 2.6 16 584 4.0Diamonds (including alluvial diamonds) 8 694 2.2 15 055 3.6Other chemical and fertilizer minerals 3 330 0.8 5 976 1.4Extraction and evaporation of salt 280 0.1 215 0.1Other mining activities and service activities incidental to mining 7 822 2.0 10 295 2.5Other minerals and materials n.e.c. 582 0.1 639 0.2Total 393 361 100.0 419 533 100.0

are considerably higher than prevailing spot commodityprices, an impairment may be triggered since the recoverablevalue of the non-financial assets may be exceeded by thecarrying value, in line with the provisions of IAS 36.Impairments can also be recorded when long-termcommodity prices are considerably lower than prevailingprices, as the perceived recoverable value (as represented bylong-term commodity price assumptions) may be lower thancurrent carrying values. Therefore, impairments can occurunder conditions of either excessive optimism orconservatism in long-term commodity price assumptions.

It was necessary to assess the long-term commodity priceassumptions relative to spot prices, as this would assist inevaluating how these assumptions influenced MineralReserve declarations. An analysis by Barclays Bank plc(2015) concluded that 65% of the South African platinummining industry was cash flow negative at 2015 spot prices,compared to only 22% of the South African gold miningindustry. The better performance by the gold mining sector isprobably attributable to a better performing gold pricecompared to the platinum price pre- and post-2015.However, the quality of investment and operational decisionsbetween the two sectors (based on their long-termcommodity price assumptions) could also have partlycontributed to differences in their financial performance.Figure 1 indicates that South African gold mining companiesadopted more conservative long-term price assumptions fortheir Mineral Reserve estimations relative to the 2015 goldaverage spot price, with the exception of Harmony Gold,which assumed a long-term price which was higher than theaverage spot price (Barclays Bank plc, 2015). As arguedearlier, these conservative assumptions would have informedthe operational and investment decisions of the SouthAfrican gold mining companies, which may have contributedto their better cash flow positions compared to platinummining companies.

Figures 2 and 3 illustrate the platinum group metals(PGMs) basket price assumptions relative to average spotprices between 2006 and 2016 for Lonmin plc (Lonmin) andImpala Platinum Holdings Limited (Impala), respectively. A

commodity basket price for a multi-metal deposit is obtainedby considering the recoverable proportions of the individualmetals found in the deposit and their respective prices, takinginto account market considerations.

Figure 2 shows that for the period 2008 to 2014, Lonminconsistently assumed long-term PGM basket prices that wereconsiderably higher than the spot prices. This optimisticlong-term price outlook would probably have contributed tothe poor investment choices made by Lonmin in bringing theK4 shaft into production in 2011. Persistent weak PGM pricesrendered the project financially unviable and Lonmin had toplace the K4 shaft on care and maintenance in November2012 (Barclays Bank plc, 2014). Figure 3 indicates that hadImpala adopted a long-term PGM basket price closer to spotprices in 2016, its Mineral Reserves would have halved,although the long-term PGM basket price assumed by Impalawas 30% above spot prices (Impala, 2016). This shows thesignificant effect of long-term commodity price assumptionson Impala’s Mineral Reserve estimates.

Figure 4 illustrates the 2015 South African goldproduction cost curve, which explains why South Africangold mines were mostly cash flow positive in 2015 (BarclaysBank plc, 2015). It was mostly operations owned byHarmony Gold (indicated as ‘HAR’ in Figure 4) which werein the upper quartile of the cost curve. This is partly thereason why Harmony Gold mines were loss-making in 2015,although this could also have been due to fact that the mineshave some of the lowest grades in the South African goldmining sector. The global PGM cost curve in Figure 5


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indicates that South African platinum mines were mostlycash flow negative in 2014 (Barclays Bank plc, 2014). Theseobservations suggest that there is a relationship betweenfinancial performance and long-term commodity priceassumptions.

Commodity prices fluctuate due to supply and demanddynamics. In the case of gold and PGMs, the period from2000 to 2008 was marked by a general upward trend in theprices of these precious metals. However, following the 2008Global Financial Crisis, the precious metal prices that hadpeaked crashed rapidly in 2009, followed by marginalrecoveries in 2010 to 2012. Table III and Figure 6 indicatethat precious metal prices continued to experience downward

trends in US dollar terms. The US dollar-denominated goldand PGM prices have shown a general downward trend from2012 to 2016, while the South African rand- (ZAR)-denominated commodity prices have shown a generalpositive trend from 2000 to 2016. The general depreciation ofthe rand against the US dollar in periods of weak US dollar-denominated commodity prices is the major reason for this .South African gold and platinum mining companies havetherefore made their long-term commodity price assumptionsin an increasing rand-price environment between 2000 and2016.

South Africa’s major gold mining companies havegenerally reported on the long-term gold price assumptions


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Table III

2016 1 249 987 613 663 575 40 18 367 14 525 9 020 9 750 8 460 5882015 1 160 1 052 692 919 544 42 14 798 13 421 8 826 11 731 6 936 5362014 1 266 1 384 803 1 128 556 58 13 731 15 009 8 710 12 237 6 027 6292013 1 411 1 485 725 1 075 826 57 13 618 14 339 7 002 10 377 7 975 5502012 1 669 1 549 644 1 270 1 070 90 13 699 12 720 5 290 10 425 8 786 7392011 1 572 1 719 733 1 990 1 036 110 11 417 12 488 5 328 14 455 7 527 7992010 1 226 1 611 526 2 384 642 180 8 977 11 792 3 854 17 451 4 702 1 3182009 973 1 205 264 1 442 425 160 8 249 10 211 2 235 12 218 3 605 1 3562008 872 1 571 352 6 455 450 110 7 203 12 980 2 909 53 321 3 718 9092007 697 1 305 355 6 076 447 415 4 909 9 192 2 499 42 805 3 149 2 9242006 604 1 142 321 4 442 350 610 4 093 7 733 2 172 30 086 2 368 4 1312005 445 897 202 2 002 169 87 2 832 5 705 1 282 12 732 1 078 5532004 410 846 230 904 186 68 2 648 5 464 1 485 5 839 1 204 4392003 364 692 199 475 93 41 2 753 5 233 1 508 3 596 704 3102002 310 540 337 768 294 40 3 272 5 688 3 548 8 095 3 095 4222001 271 529 604 1 582 413 80 2 334 4 557 5 199 13 623 3 556 6892000 279 545 743 1 993 415 160 1 937 3 780 5 155 13 832 2 880 1 110


used in their Mineral Reserve declarations. Table IV showsthat by 2001, a year after the introduction of the SAMRECCode, the three major South African gold producers startedreporting their long-term gold price assumptions. Table IVand Figure 7 also show that between 2000 and 2016, SouthAfrican gold mining companies assumed long-term goldprices, in rand per kilogram terms, that were consistentlyeither lower than or in line with prevailing spot prices. Thissuggests that South African gold mining companies had alower probability of reporting unprofitable ounces as part oftheir Mineral Reserves in the period from 2000 to 2016. Theabbreviation ‘NR’ means ‘not reported’ and ‘N/A’ means ‘notapplicable’. For example, in Table IV, Sibanye Gold did notexist as a gold mining company hence ‘N/A’ is used between2000 and 2011.

The history of South African platinum mining companiesas regards reporting long-term price assumptions in MineralReserve declaration between 2000 and 2016 has been lessdetailed than that of the gold mining companies. Implats andNortham began reporting on long-term platinum prices onlyin 2003, followed by Lonmin in 2005; while Anglo AmericanPlatinum (Amplats) did not report its long-term priceassumptions in the period under review, as shown in Table V.Figure 8 and Table V show that between 2003 and 2016,South African platinum mining companies generally reportedlong-term platinum prices that were higher than prevailingspot prices. Implats’ long-term platinum prices have oftenbeen the most bullish throughout the period under review,while Northam’s long-term prices have been relativelyconservative. Figure 9 shows that for the other PGMs, SouthAfrican platinum mining companies have generally reportedlong-term prices higher than spot prices for palladiumbetween 2000 and 2016 and more optimistic long-term prices(relative to spot) for rhodium between 2009 and 2016.However, for gold and iridium, South African platinummining companies have generally reported long-term pricesthat were lower than spot prices. The reporting trends ofSouth African platinum mining companies suggest thatbetween 2000 and 2016, they were more likely than goldmining companies to report uneconomic ounces as part oftheir Mineral Reserves. Persistent reporting of uneconomicounces can trigger impairment.

As discussed earlier, Appleyard (2001) suggested that

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Table IV

2016 590 506 530 000 475 107 550 000 490 0002015 475 767 431 000 450 026 500 000 430 0002014 441 465 398 452 425 064 400 000 420 0002013 437 828 360 252 400 148 400 000 410 0002012 440 417 290 064 339 833 380 000 380 0002011 367 051 269 841 279 888 310 000 N/A2010 288 628 238 028 250 149 265 000 N/A2009 265 204 227 627 224 975 230 000 N/A2008 231 573 200 698 179 883 150 000 N/A2007 157 820 148 536 115 022 100 000 N/A2006 131 587 114 939 104 972 92 000 N/A2005 91 065 86 807 91 996 92 000 N/A2004 85 121 94 764 91 996 90 000 N/A2003 88 522 78 769 92 948 95 000 N/A2002 105 194 94 041 94 845 95 111 N/A2001 75 056 71 262 67 388 69 992 N/A2000 62 279 NR 60 033 NR N/A

NR Not reportedN/A Not applicable


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Table V

2016 14 525 18 648 20 291 20 729 NR 15 5002015 13 421 17 718 19 357 18 632 NR N/A2014 15 009 26 760 13 455 16 785 NR N/A2013 14 339 18 778 15 925 16 785 NR N/A2012 12 720 16 080 11 963 14 875 NR N/A2011 12 488 22 560 12 866 15 200 NR N/A2010 11 792 27 716 12 360 14 904 NR N/A2009 10 211 20 879 9 450 14 400 NR N/A2008 12 980 24 083 14 391 12 000 NR N/A2007 9 192 11 085 6 670 9 208 NR N/A2006 7 733 7 850 5 850 7 700 NR N/A2005 5 705 6 700 4 950 4 940 NR N/A2004 5 464 6 100 4 347 NR NR N/A2003 5 233 6 100 5 004 NR NR N/A2002 5 688 NR NR NR NR N/A2001 4 557 NR NR NR NR N/A2000 3 780 NR NR NR NR N/A

NR: Not reportedN/A Not applicable


Mineral Reserves are most sensitive to commodity pricesamong the modifying factors. However, other modifyingfactors are also important for Mineral Reserve estimation. Itwas therefore necessary to establish the relationship betweenthe Mineral Reserve estimates of South African gold andplatinum mining companies and their reported modifyingfactors. The coefficient of determination (R2) was used toassess the relationship between Mineral Reserve estimatesand modifying factors. R2 measures the correlation betweentwo variables by determining how changes in theindependent variable affect the dependent variable. R2 usesregression to determine the fit between two sets of variablesand indicates the strength of the relationship between thevariables. R2 values typically range between 0 and 1, withvalues closer to 1 indicating a stronger relationship. R2 ismeasured using the formula:

R2 = Regression sum of squares (SSR)

Total sum of squares (SSTO)

where SSR is a measure of the sum of the squared differencesbetween the regression line and the mean line of data-pointsand SSTO is a measure of the squared differences betweendata-points and their mean line. The process for estimatingR2 involves first plotting the two variables whose relationship

is being tested on the y and x axes, with the dependentvariable on the y-axis and the independent variable on the x-axis. The best fit or regression line is then fitted to the data-points, followed by a horizontal line representing the mean ofthe dependent variable (y). SSR and SSTO are then calculatedbased on the original data points and points on the mean andregression lines to allow the calculation of R2 (Penn StateEberly College of Science, n.d.).Table VI shows a rating scalefor the R2 values for ranking the strengths of the correlationsbetween the Mineral Reserves and modifying factors. TablesVII and VIII provide a summary of R2 values betweenreported modifying factors and declared Mineral Reserves.Tables VII and VIII show that the reported Mineral Reservesof South African gold and platinum mining companies

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Table VI

Correlation rating Poor Moderate GoodColour Red Orange Green

Table VII

between 2000 and 2016 were mostly sensitive to long-termcommodity prices as the R2 (on average) values are generallyhigher than those of the other modifying factors.

An assessment of the non-financial asset impairments ofSouth African gold and platinum mining companies from2000 to 2016 gives an indication of the relationship betweenasset carrying values as represented by long-term commodityprices and recoverable values as represented by prevailingspot prices.

The major South African gold mining companies mostlyassumed rand-denominated long-term gold prices lower thanspot prices between 2000 and 2016. However, thesecompanies recorded significant non-financial assetimpairments in this period, as shown in Table IX. Thisindicates that having a conservative view on long-term pricesdoes not prevent the incurring of impairments. However,Figure 10 shows that when long-term gold price assumptionsof the South African gold mining companies were within ±5%of spot prices, then minimal impairments were recorded. Themajority of impairments were recorded outside the ±5% long-term gold price to spot price range, which suggests that thiscould be an ideal long-term gold price assumption range inMineral Reserve declarations for South African gold miningcompanies.

Among South Africa’s major platinum mining companies,Implats and Lonmin have on average assumed long-termplatinum prices that were higher than spot prices between

2003 and 2016, as shown in Table X. Northam assumedconservative long-term platinum prices (relative to spotprices) in the earlier part of the period and higher prices inthe latter part, resulting in an average variance of zero overthe period. Since Amplats did not report its assumed long-term platinum price, a comparison with spot prices could notbe undertaken. The major South African platinum miningcompanies have also recorded significant non-financial assetimpairments in the period from 2000 to 2016, with Northamrecording the least impairments (Table X). Figure 11 showsthat of the several impairments recorded by the major SouthAfrican platinum mining companies from 2000 to 2016, veryfew occurred in the ±5% long-term platinum price to spotprice ratio range. The historical long-term commodity pricesused for impairment testing purposes would have been in linewith the long-term prices used for Mineral Reserveestimation. The use of long-term commodity prices that werewithin 5% of prevailing spot prices resulted in reporting ofounces that were economically mineable (Mineral Reserves)under the prevailing conditions, as evidenced by the limitednumber of impairments incurred within this commodity pricerange. This suggests that this range is ideal for long-termplatinum prices to minimize impairments for South Africanplatinum mining companies.

This study evaluated the impact of modifying factors on theMineral Reserve estimates reported by the major SouthAfrican gold and platinum mining companies from 2000 to2016. Among the modifying factors used in Mineral Reserve


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Table VIII


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estimation, the Mineral Reserves of South African gold andplatinum mining companies appeared to have been mostsensitive to changes in long-term gold and platinum pricesbetween 2000 and 2016. The study further noted that SouthAfrica’s major gold mining companies consistently reportedthe long-term gold prices used in their Mineral Reserves from2001, a year after the introduction of the SAMREC Code.Mineral Reserve reporting by South Africa’s major platinummining companies was less detailed than that by gold miningcompanies. The reporting of long-term platinum prices usedin Mineral Reserve estimation by platinum mining companiesonly started between 2003 and 2005. Amplats did not reportits long-term platinum prices over the period between 2000

and 2016. The South African gold mining companies reportedlong-term rand-denominated gold prices that were lower thanprevailing spot prices over the 2000 to 2016 period. Theplatinum mining companies, however, reported long-termplatinum price assumptions that were mostly higher thanprevailing spot prices. Therefore, South African platinummining companies were most likely to have reported ouncesthat were uneconomic as part of their Mineral Reserves andwould have been more prone to impairments between 2000and 2016. An assessment of long-term gold and platinumprices relative to historical spot prices and their impact on thenumber of non-financial asset impairments recorded bySouth Africa’s gold and platinum mining companies revealed

Table IX

that the least number of impairments were recorded whenlong-term commodity prices were within ±5% of prevailingspot prices. This suggests that if South Africa’s gold andplatinum mining companies keep their long-term commodityprices within ±5% of rand-denominated spot prices, it couldresult in more reliable Mineral Reserve estimates, whichcould clearly demonstrate economic viability as evidenced bya potentially limited number of impairments incurred in thefuture.

The work reported in this paper is part of an MSc researchstudy in the School of Mining Engineering at the Universityof the Witwatersrand.

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ANGLO AMERICAN PLC. 2005. Annual Report 2005.http://china.angloamerican.com/~/media/Files/A/Anglo-American-


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ANGLO PLATINUM LIMITED. 2006. Annual Report 2006.http://www.angloamericanplatinum.com/~/media/Files/A/Anglo-American-Platinum/annual-reports/2006.pdf [accessed 14 October 2017].



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